Early in my career I learned a valuable lesson. In the course of a transaction, a question arose as to how much in pension assets were to be transferred to the buyer’s plan. The pensions for employees transferring with the business were guaranteed and never in jeopardy. The only question was who would pay to fully fund the pension plan, the buyer, one large company or the seller, another large company?
Much disinformation exists about the roots and causes of our current financial crisis. Republicans blame Democrats, and vice versa. Banks blame government policy, and vice versa. Homeowners blame lenders, and vice versa. The US government faults the failure of the Chinese to let the yuan rise in value. The blame game is endless.
Government and its supporters have promised financial salvation in little understood programs such as TARP, TALF, QE1 and QE2. By design these programs are meant to confuse and mislead legislators and the public. The pseudo science of Federal Reserve and Treasury Keynesian technocrats has produced few if any promised results. I believe that these programs have been deliberately designed to hide their designers’ true agendas: socializing losses among taxpayers, and allowing malefactors to keep profits and undeserved, out-sized executive bonuses. Non-stop government propaganda again supports keeping the truth from the public. See 1984 in 2010. What is missing from the discussion is the proper allocation of both blame and responsibility. And logically flowing from that absent conversation would be the fundamental question now: who should pay?
Ireland’s current financial crisis foreshadows what could happen here.
Ireland Pays and Pays
After steadfastly considering a bailout, the Irish government stated that it intended to negotiate a bailout package with the EU and the IMF. Reports indicate the package could exceed $85 billion Euros ($149b). The government would take over one bank and take a majority stake in another bank. Report Asia One News
The central bankers have extracted financial concessions from the Irish government. Ireland must operate under an austerity budget with increased property and taxes on the wealthy coupled with a ten percent or more budget cut each year for the next four years. It is expected that the current government will be dissolved and new elections held.
How Did Ireland Get Into This Mess?
Like many economies, Ireland’s recent prosperity was built on a real estate boom.
Much of its growth was built around the property market, but since 2008 this has suffered a dramatic collapse.
House values have fallen by between 50% and 60%, and bad debts – mainly in the form of loans to developers – have built up in the country’s main banks. This almost wrecked the institutions, leaving them needing bailing out by the government at a cost of 45bn euros (£39bn; $60.1bn).
This has opened a huge hole in the Irish government’s finances – which will see it run a budget deficit equivalent to 32% of GDP this year. See BBC Q&A: Irish Republic Finances
When the property market collapsed the government stepped in to save its banks:
As several of the banks have been part-nationalised, most of their massive debt is now actually government debt.
And the great majority of this debt is owed to foreign lenders, which the Irish banks (and therefore the Irish government) simply cannot afford to default on. See BBC Q&A: Irish Republic Finances
Thus, the government saved foreign holders of Irish debt and the private Irish bank bondholders. The losers are the Irish taxpayer and their economy.
The US Taxpayer Also Pays and Pays
Seemingly innocuous words and phrases such as “bailout,” “government guarantee,” “quantitative easing” or “Troubled Asset Relief Program” hide the true nature of the governmental objective. Whether it is Bank of America, General Motors, General Electric, Citicorp or Chrysler, these are enormous businesses that made bad decisions. The litany is long and undistinguished: lending irresponsibly (no income, no job loans); using too much leverage (Bear and Lehman); selecting the wrong products (SUVs during the oil price crisis) or misleading accounting (GE pension accounting). All of these were private businesses pursuing profits. Shareholders and bondholders of these enterprises willingly invested, hoping for share appreciation, dividends and interest payments. They understood the risk that businesses could go bankrupt, or dividends and interest suspended.
The rallying cry of “save the banks” or “save GM” is really a way of transferring losses from the business and its investors to the taxpayer. With QE2 we face the prospect of the taxpayer/consumer paying the hidden tax of higher inflation. Just after QE2 was announced the Fed revealed its true purpose: saving the banks yet again by requiring a second round of bank stress tests.
A Moment of Morality
Karl Denninger provides an unvarnished view of the morality of the Irish bailout, the parallels to the US and what must happen:
Looting becomes impossible to sustain eventually. Now the Irish Government thinks that the Irish people should pay for being robbed!
It’s not enough to get ripped off – now the government wants to tax the people to pay for the stealing that they allowed to happen in the first place.
This is no different than what happened in Greece or the United States for that matter, and it will continue to happen until the people stand up and refuse to accept it.
Further, and far more importantly, shifting the bad debt around doesn’t get rid of it. It simply tries to impose the cost on the nation as a tax – a tax that cannot be paid, and won’t be paid.
To the Irish people: You must choose between putting a stop to this – no matter what it takes to enforce that demand – and literal debt peonage and servitude imposed upon you for the sins of a handful of rich bastards that robbed all of you. See Another Lie Exposed: Ireland
Behind all these fancy financial terms and maneuverings there is a moral dimension. Judeo-Christian theology is based on concepts of reward and punishment. Capitalism follows the same path. Rewarding financial elites who misbehaved, and punishing hardworking, prudent taxpayers, runs contrary to a moral core. The programmatic maneuverings blur the distinction between right and wrong. Further, from an economic viewpoint it encourages moral hazard, that is, risk taking without fear of punishment. Ultimately, the populace refuses to accept this new burdensome status quo and real trouble starts.
Until now, we in the US have accepted the status quo that we must save banks, auto companies and insurance outfits and further burden taxpayers. Has anyone in authority explained why, or offered any other alternatives? If we don’t ask these questions soon, we face a weekend like Ireland is experiencing right now: looking down the gun barrel of austerity and increased taxes or worse.
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